Manipulation in the Bitcoin Market?

As cryptocurrency exchange BitMEX initiated its scheduled maintenance on August 22, the Bitcoin price surged by 4 percent, during a period in which crypto traders could no longer short the dominant crypto.

Analysts have stated that the strong rally of Bitcoin in the two-hour period during which BitMEX was temporarily down was not a coincidence.

Was Bitcoin Market Manipulated?

BitMEX is arguably the most popular margin trading platform for Bitcoin and Ethereum traders alongside Bitfinex. According to large FX market maker and crypto trader Alex Kruger, BitMEX has a 40 percent market share over the BTC-USD trading pair, the most liquid Bitcoin trading pair in the global market.

On BitMEX, investors can trade with more Bitcoin than they already have with leverage. Hence, with 1 Bitcoin, if a trader enters a 10x leverage trade, the trader can trade with 10 Bitcoin against the US dollar.

With the margin trading system of BitMEX, traders can record major gains by either trading against or for Bitcoin, increasing their profits with the leverage they use. But, many traders also lose out on the majority of trades on the platform, as high leverage leads to smaller liquidation margins.

On August 22, BitMEX experienced a two-hour downtime due to its scheduled maintenance, which was disclosed to investors on August 19. In its official announcement released three days ago, BitMEX said:

“On Wednesday, August 22 at 01:00 UTC, BitMEX will be performing maintenance to improve engine performance. This will require migrating the physical machine that trading operations execute upon, which will require temporarily taking down trading. Trading will suspend at 01:00 UTC and the site will enter maintenance mode shortly thereafter. We expect this maintenance to take 30 minutes and will update our users via Twitter throughout.”

While some have claimed that short contract holders on BitMEX were liquidated as they could no longer close out their contracts, it is not realistic to state that the liquidation of short contracts on BitMEX caused the price of Bitcoin to surge given that investors were made aware of the system maintenance of BitMEX for several days.

Rather, as Kruger pointed out, it is more likely that large-scale traders manipulated the price of Bitcoin and correlated the inorganic movement with the BitMEX downtime to make it seem legitimate.

“The BTC lightning +7% breakout during Bitmex’s downtime shows why odds of SEC approving the CBOE bitcoin ETF proposal should be close to zero. Even if no manipulation (that’s debatable) this stresses the importance of Bitmex, a fully unregulated market with 40% market share.”

The SEC Has Already Taken Notice

Market and price manipulation have always been the concern of the US Securities and Exchange Commission (SEC) in approving the publicly tradable instrument.

The filing of Bitcoin ETFs by Cboe and VanEck, two highly respected financial institutions in the US with decades of track record, increased the probability of the approval of Bitcoin ETFs, but the issue with exchange manipulation still remains as a real problem for the SEC.

The Winklevoss Bitcoin ETF was disapproved by the SEC because it relied on Gemini, a US-based exchange, to assess the value of Bitcoin in real-time. As long as abnormal market movements occur in a suspicious manner like the August 22 price surge of Bitcoin, the SEC will not be comfortable in allowing institutions to support ETFs with the pricing obtained from exchanges.

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